Model 3 Production Miss Sounds Bad, but Doesn’t Change the Magnitude of Opportunity

The Tesla story may feel like a waiting game. Tonight, Tesla reported Q3 deliveries and production results for the Sept-17 quarter which fell short of expectations due to a 4.8k order push out for the Model X and S into Dec-17, as well as a manufacturing bottleneck for the Model 3. These results further validate our thesis that EV and autonomy will take longer than most think, but eventually will be more impactful than most can imagine. Our optimism around Tesla’s ability to capitalize on the shift to EV, autonomy, and renewable energy has not changed.

The real problem is that tonight’s results chip away at investor Model 3 production confidence. Adjusting Street models from 1.1k units in Sep-17 down to the reported 220 Model 3 production is immaterial to the model. What is material is this production miss will fuel investor concerns about the slope of the Model 3 ramp. While we believe Model 3 production will largely be a guessing game over the next few quarters, and could produce future disappointments, it’s important to note Tesla has over 500k net reservations for the Model 3, and we remain confident that Model 3’s value will stoke demand for the next several years. We expect Model 3 to have a breakout year in 2019. (We are modeling 359k deliveries in 2019, up from 300k in 2018.)

Model Changes to Model 3: For the Dec-17 quarter, we’re now expecting 5.6k Model 3 deliveries, compared to the Street which was 15.8k. For 2018, our new numbers expect 200k (reduced by 8%) Model 3 delivers, compared to the Street which was previously at ~280k.

Model Changes to Model X and S: A second part of tonight’s announcement was demand for Model X and S, which is trending inline with Street expectations of ~100k Model S and X units for 2017.

When Will We See Profitability? Our time to profitability estimate is unchanged. We continue to expect Tesla to show its first profit in the Dec-19 quarter and be profitable in the full year 2020.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.